A preferred stock is a class of ownership in a corporation that has a

higher claim on its assets and earnings than common stock. Preferred
shares generally have a dividend that must be paid out before dividends
to common shareholders, and the shares usually do not carry voting
rights.
Component Cost of
Preferred Stock
rp is the marginal cost of preferred stock, which is
the return investors require on a firms preferred
stock.
Preferred dividends are not tax-deductible, so no
tax adjustments necessary. Just use nominal rp.
Our calculation ignores possible flotation costs.
Coleman cost of
preferred stock
The cost of preferred stock can be solved by using this
formula:

rp = Dp/Pp
= 0.1 ($100)
$ 111.10
= $10/$111.10
= 0.090
= 9%

COPYRIGHT 2012 PEARSON EDUCATION, INC. PUBLISHING

AS PRENTICE HALL
5-18
Is preferred stock more or less
risky to investors than debt?
More risky; because the firm is not required to pay preferred dividend
to the preferred stockholders
However, the firm should pay preferred dividend before compensating
the common dividend.